For many businesses, inventory represents the largest physical asset the company owns. These businesses store their inventory in warehouses until they need it in production or to deliver to a customer. The warehouse personnel handle the receiving process when inventory arrives from vendors. Warehouse personnel also manage shipping completed orders to customers. Warehouses rely on internal controls to ensure the inventory is recorded accurately and kept safe.
Internal control procedures include using sequential numbering for all receiving documents, shipping documents and warehouse transfer documentation. Sequential numbering requires that each type of document includes a numbering system, and that each form is numbered in order. This allows the warehouse to account for each independent form using the form number. If any pages turn up missing, the warehouse personnel can identify the specific pages based on the missing numbers.
Internal control procedures also involve the use of video cameras throughout the warehouse. Video cameras monitor all the activities that occur within the warehouse, and all movement regarding the inventory. If inventory disappears, the company reviews the video recording. Any unauthorized inventory transfers appear on the video recording and provide evidence of the actual event.
Internal control procedures in the warehouse also incorporate segregation of warehouse responsibilities. Every activity that happens in the warehouse requires multiple employees to complete individual steps. For example, when a warehouse receives inventory, one employee documents the quantities and products received, while another enters that information into the computer system. A third employee might compare these numbers to the packing slip from the vendor.
The physical inventory audit represents an internal control procedure performed at least once per year. Warehouse staff physically count each inventory item, creating a record of the actual quantity of each. The physical inventory audit involves bringing in non-warehouse personnel to recount the inventory. Employees compare the second inventory count to the first and identify any discrepancies. Another group of employees recounts the inventory with discrepancies to determine the final count. Once the final inventory quantities are determined, the system quantities are adjusted to equal the count from audit.